Interest received before commencement of business is capital receipt has to be set-off against pre operative expenses

Interest before commencement of business

Where assessee, engaged in business of developing, operating and maintenance of power projects, received certain interest on surplus funds, that were deposited in Government securities, prior to implementation of its projects, amount so received was to be treated as capital receipt

G.D. Agrawal, Vice-President – This appeal by the assessee is directed against the order of the Ld. Commissioner of Income-tax (Appeals)-6, Ahmedabad dated 07.09.2011 for Assessment Year 2008-09.

2. In this appeal by the assessee, following grounds were raised:—

1.

In law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in dismissing Ground No. 1 of the appellant’s appeal challenging the validity of the assessment order impugned before him, on the ground that it was general in nature not requiring any adjudication by him.

2.

In law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in upholding addition of Rs. 1,35,87,158 to the appellant’s returned income made by the learned Assessing Officer on account of interest income which, on account of its peculiar nature of being a capital receipt, had not been offered to be taxed by the appellant. The learned CIT(A) ought to have appreciated, inter alia, that the appellant’s case in respect of this particular item of interest was based on the ratio of the decision of the Supreme Court inCIT v. Karnal Cooperative Sugar Mills Ltd. (243 ITR 2) and being such, it was not open to him to uphold the impugned addition on the ground that the same was taxable in terms of the decision of the Supreme Court inTuticorin Alkali Chemicals and Fertilizers Ltd.’s case (227 ITR 172).

3.

In law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in upholding the learned Assessing Officer’s rejection of the appellant’s claim made in writing during the course of the assessment proceedings that of the interest income of Rs.7,91,51,306 which the appellant had offered for tax (total interest income of Rs.9,31,33,148 minus interest income not offered for tax Rs.1,39,81,841), interest income of Rs.2,03,36,936 was such in nature as to be covered by the ratio of the decision of the Delhi High Court inIndian Oil Panipat Power Consortium Ltd. v. ITO (315 ITR 255) which had been rendered after due consideration of the decision of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd.’s case (227 ITR 172) and that the same was not assessable to tax. The learned CIT(A) ought to have appreciated, inter alia, that it cannot be open to him to uphold the impugned rejection of the appellant’s claim by suggesting (vide para 4.3 of the impugned Appellate Order):

(a)

firstly, that it was not in dispute that the facts of earning interest on temporary surplus in the case of the appellant as well as in the case of the assessee before the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd.’s case (227 ITR 172) are similar although, when it was the appellant’s specific case before him that its case was very much covered by the decision of the Delhi High Court which had been arrived at after considering the decision of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd.’s case (227 ITR 172), such a suggestion was entirely misplaced;

and

(b)

Secondly, that the decision of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd.’s case (227 ITR 172) cannot be ignored just because Delhi High Court had distinguished the case before it from the case before the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd.’s case (227 ITR 172);

(b)

that when the appellant had so elaborately explained as to how its case was covered by the decision of the Delhi High Court which had itself been arrived at after consideration of the decision of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd.’s case (227 ITR 172), it cannot be open to him to summarily dismiss the appellant’s case by merely making general observations at para 4.3 of the impugned Appellate Order.

4.

In law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in dismissing the appellant’s claim (made vide Ground No. 4 of its appeal before him) that for the elaborate reasons explained in the Statement of Facts accompanying the appellant’s appeal (including those in the Article “Supreme Court Decision in Tuticorin Alkali Chemicals’ Case (227 ITR 172) – Craves For An Urgent Review” [151 CTR -Articles 240] a copy whereof had been attached as an Annexure to the Statement of Facts), the remaining amount of interest income of Rs.7,91,51,306 (Rs.9,31,33,147 minus Rs.1,39,81,841) (and not merely Rs.2,03,36,936) forming part thereof for which the appellant had made a claim during the course of the assessment proceedings, deserved to be regarded to be of capital nature required to be set off against the capital cost of the appellant’s project and, therefore, as not taxable.

5.

In law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in dismissing ground No.5 of the appellant’s appeal before him challenging initiation of penalty proceedings u/s. 271(1)(c) by treating it as pre-mature. He ought to have appreciated, inter alia, that in the peculiar facts and circumstances of the appellant’s case, there being absolutely no warrant/justification for initiating the penalty proceedings, he ought to have ordered for their being dropped, thereby saving both the appellant and the Department from long drawn unnecessary litigation.

6.

The appellant craves leave to add, amend and/or alter the ground or grounds of appeal either before or at the time of hearing of the appeal.

3. With regard to Ground Nos. 1, 5 & 6, no argument was advanced at the time of hearing; accordingly, these grounds are treated as not pressed and rejected as such.

4. Ground Nos. 2, 3 and 4 are interrelated as all these three grounds are relating to chargeability of interest income which is claimed to be capital receipt by the assessee and set off against the project development expenditure. Therefore, all these three grounds are considered together.

5. The facts of the case are that the assessee is a Limited Company which is engaged in the business of developing, operating, maintenance of Power Projects and sale of power. Admittedly, during the year under consideration, the assessee-company’s projects were under implementation and has not started any commercial activities. Accordingly, no Profit & Loss Account for the year under consideration has been prepared. The expenditure during the construction period is shown in the balance-sheet as project development expenditure and capital work in progress. As per Schedule VI of the assessee’s balance-sheet as on 31st March 2008, the total project development expenditure was Rs.178.56 crores. After setting off there from Rs.16.11 crores, the assessee carried forward a sum of Rs.162.45 crores in its balance-sheet as project development expenditure. The income of Rs. 16.11 crores included interest income of Rs.11,66,14,614/-. The interest income up to 31.03.2007 was Rs.2,34,81,466/-. Thus, the interest income pertaining to the accounting year relevant to assessment year under consideration was Rs.9,31,33,148/- (Rs.11,66,14,614 – Rs.2,34,81,466). In the return of income, the assessee offered the income of Rs.7,91,51,306/- and the details of which is as under:—

Interest income offered for Tax

Particulars

Amount Rs.

Interest on ICD

58,814,370

Interest on general purpose investment

1,765,955

Interest on general purpose investment

6,829,678

Interest from Securities

11,739,986

Interest receivable on N.S.C.

1,317

Total

79,151,306

6. However, the assessee claimed the interest income of Rs.1,39,81,841/-to be capital receipt not liable to be taxed and the details of which is as under:—

Interest Income not offered for Tax

Purpose

FD Amt

Rate of Int.

Int. Receivable

GUVNL-BID BOND

40,000,000

8.25%

3,012,276

GUVNL-BID BOND

37,500,000

7.75%

3,433,559

HPGCL – BID BOND

72,000,000

8.50%

2,186,349

HPGCL – BID BOND

13,500,000

8.50%

409,940

MSEDCL – BG

30,000,000

8.25%

284,016

MSEDCL – BG

30,000,000

8.25%

284,016

MSEDCL – BG

30,000,000

8.25%

284,016

GUVNL-BID BOND

17,500,000

9.15%

1,681,897

Chhattisgarh – BID BIND

60,000,000

7%

1,004,839

Margin Money – LC Dalian Insular

30,000,000

3.50%

3,94,683

Margin Money – Coal Mining

90,000,000

8.75%

1,006,250

Total

13,981,841

7. During the course of assessment proceedings, the assessee vide letter dated 24.08.2010 claimed that out of interest income of Rs.7,91,51,306/-which is offered as interest income in the return of income, a sum of Rs.2,03,36,936/- from FDs and Govt. Securities to be exempt. The Assessing Officer accepted the assessee’s claim only with regard to the interest income of Rs.3,94,683/- which was the interest earned from the margin money of Rs. 3 crores. Thus, out of the sum of Rs.1,39,81,841/- claimed as exempt in the return of income, the Assessing Officer accepted the assessee’s claim only for the sum of Rs.3,94,683/- and made the addition of Rs.1,35,87,158/-. With regard to interest income offered by the assessee for tax at Rs.7,91,51,306/-, the Assessing Officer did not accept the assessee’s contention that the sum of Rs.2,03,36,936/- is capital receipt; accordingly, he assessed the entire sum of Rs.7,91,51,306/- as offered by the assessee in the return of income.

8. The assessee, aggrieved with the order of the Assessing Officer, filed appeal before the CIT(A). Before the CIT(A), the assessee claimed the entire interest income to be capital receipt. Vide Ground No.2, the assessee claimed interest income of Rs.1,35,87,158/- to be non-taxable and vide Ground No.4 the assessee claimed the entire remaining interest income of Rs.7,91,51,306/- to be non-taxable. The CIT(A) rejected Ground No.2 of the assessee’s appeal which was with regard to assessee’s claim for non-taxability of Rs.1,35,87,158/- with the following finding in his order:—

“3.3 I have considered the facts of the case; assessment order and appellant’s submission. It is not in dispute that appellant’s business

From the above it is clear that apart from investment of temporary surplus funds, the deposit with electricity board or loan to employee’s also provided interest income which was not considered a part of the project but treated as revenue receipt taxable under section 56 of IT Act. In the case of appellant also the investment in bonds might be required for the purpose of entering into power purchases agreement but revenue is flowing from investment in bonds and not from the implementation of projects or purchases of plant and machinery. LC margin money interest was considered inextricably linked to the project by the assessing officer and accordingly he allowed the same to be reduced from project cost. Apart from this no other interest income is directly coming from implementation of the project or purchases of plant and machinery. Power purchases agreement may require some security in the form of bond but that does not mean that investment was linked to the implementation of project. Since honourable Supreme Court in the case of Tuticorin Alkalies Chemicals and Fertilisers Ltd had considered even interest on deposit with electricity board as taxable income, there is no basis for not offering the same as taxable in other sources head. None of the decision referred by the appellant has overruled the landmark decision of Supreme Court in the case of Tuticorin Alkalies Chemicals and Fertilisers Ltd. In view of this, unless the income is inextricably linked to the implementation of the project, the same cannot be reduced from the cost of the project and accordingly the income will be faxed. The decision of honourable Supreme Court in the case of Bokaro Steel Ltd and Karnal Corporate Sugar Mills Ltd do not support the appellant’s claim since in both the cases, interest income was directly coming from the implementation of the project. In the appellant’s case, the same is from investment in bond required as security for PPA and not for setting up the project. PPA is not for implementation of the project but the same is for safe of electricity after commencement of business. Therefore appellant does not get benefit from these decisions. The other decisions relied upon by the appellant are on the interpretation of apex court decisions referred earlier. Since facts of the appellant’s case are similar to the decision of apex court, appellant is liable for tax on interest. The addition made by the assessing officer is accordingly confirmed.”

9. Ground No.4 of the assessee’s appeal, which was with regard to non-taxability of sum of Rs.7,91,51,306/-, was also rejected by the CIT(A) with the following finding:—

“5.2 I have considered the facts of the case and appellant’s submission. Appellant earned interest on inter-corporate deposits deployed out of surplus fund available. The said interest was duly offered for tax in other sources head. The said income was never claimed as exempt during assessment proceedings. Only in appeal claim was made that this interest income is not taxable in view of Delhi High Court decision in the case of Indian Oil Corporation Ltd and another decision in the case of Jaypee DSC Ventures Ltd. I have gone through both the decisions and none of the decision applies to the facts of the appellant. Appellant used the surplus fund in intercorporate deposits and earned interest income on the same. The earning of interest income is not inextricably linked to the construction of project. In the identical facts, honourable Supreme Court held that interest income earned from temporary deployment of surplus fund is taxable in other sources head. In view of the decision of honourable Supreme Court, this ground which is taken for the first time in appeal is not sustainable. Accordingly the same is dismissed.”

10. The assessee, aggrieved with the order of the CIT(A), is in appeal before us.

11. At the time of hearing before us, it is submitted by the ld. Counsel that admittedly during the year under consideration the assessee was in the process of setting up of the power plant and its business had not commenced. He referred to paragraph 3 of the assessment order and pointed out that the Assessing Officer has also admitted that the assessee has not started any commercial activity. He, therefore, submitted that the limited question in all the grounds raised by the assessee is whether the interest earned by the assessee from the surplus fund, which was admittedly collected by the assessee for the purpose of implementation of the power project, is a capital receipt liable to be adjusted against the project development expenditure. In the audit report, the assessee has adjusted the interest receipt against the project development expenditure. He referred to paragraph 6 of the schedule to the audit report. He stated that the Assessing Officer as well as CIT(A) has solely relied upon the decision of Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT[1997] 227 ITR 172 ignoring the number of subsequent decisions of Hon’ble Apex Court. He referred to following decisions of Hon’ble Apex Court:—

i.

CIT v. Bokaro Steel Ltd, [1999] 236 ITR 315

ii.

CIT v. Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2

iii.

CIT v.. Karnataka Power Corpn. [2001] 247 ITR 268

iv.

Bongaigaon Refinery & Petrochemicals Ltd. v. CIT [2001] 251 ITR 32912. He further referred to the decision of Hon’ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd.v. ITO [2009] 315 ITR 255 and pointed out that in this case the Hon’ble Delhi High Court has made a comparative analysis of the decision of Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd.(supra) and subsequent decision of Bokaro Steel Ltd. (supra) and then pointed out that what is the position of law after considering both these decisions. That the Hon’ble Delhi High Court, after considering both the decisions, has arrived at the conclusion that the interest earned prior to commencement of business on the funds brought in by way of share capital for specific purpose is capital receipt which is liable to be set off against pre-operative expenses. That the facts of the assessee’s case squarely fall within the ambit of the law laid down by the Hon’ble Delhi High Court. He stated that the CIT(A) denied to apply the decision of Hon’ble Delhi High Court on the ground that when the issue is squarely covered by the decision of Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), the decision of Hon’ble High Court cannot be considered and applied. He stated that the Hon’ble Delhi High Court has interpreted the decision of Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and also the subsequent decision of Hon’ble Apex Court in the case of Bokaro Steel Ltd. (supra) and has pointed out what is the correct law as laid down by the Hon’ble Apex Court. He, therefore, submitted that the interpretation of the Hon’ble Delhi High Court with regard to decision of Hon’ble Apex Court is to be preferred in comparison to the interpretation of the ld. CIT(A). He further pointed out that in the subsequent following decisions the Hon’ble Delhi High Court reiterated the same view:—

a.

NTPC Sail Power Company (P) Ltd. v. CIT 210 Taxman 358 (Delhi);

b.

CIT v. Sasan Power Ltd. 205 Taxman 56 (Mag.) (Delhi)

13. He, therefore, submitted that the entire interest income received by the assessee was out of the funds brought in for the purpose of power projects. That part of the funds was invested in the securities and bonds which were required for giving bank guarantee or for giving as margin money. These investments were necessary and integral to the implementation of power projects. Some interest income was earned out of temporary availability of funds which were brought in for the purpose of power projects and utilized for earning of interest income till the fund was actually utilized in the implementation of power projects. He submitted that there is no dispute that the entire capital raised by the assessee and the entire money borrowed by the assessee was only for the specific purpose of setting up of the power projects. He, therefore, submitted that in view of catena of above decisions of the Hon’ble Apex Court, which is subsequent to the decision ofTuticorin Alkali Chemicals & Fertilizers Ltd. (supra), as interpreted by the Hon’ble Delhi High Court, the interest earned prior to commencement of the business on the funds brought in for specific purpose is capital receipt which is liable to be set off against pre-operative expenses. He reiterated that the entire receipt of interest has been set off against the project development expenditure and the auditors have not pointed out any mistake in the above accounting by the assessee. He, therefore, submitted that the addition made by the Assessing Officer and sustained by the CIT(A) should be allowed.

14. The ld. Departmental Representative, on the other hand, relied upon the order of the Assessing Officer as well as CIT(A). He submitted that the decision of the Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) is very clear and it says that the interest earned prior to commencement of business is assessable under the head “income from other sources”. That, the assessee itself has treated the sum of Rs.7,91,51,306/- as taxable and offered the same in the return of income. It is only before the CIT(A) the assessee claimed the sum of Rs.7,91,51,306/- to be capital receipt. He, therefore, submitted that when the issue is squarely covered by the decision of Hon’ble Apex Court, the same is binding upon all the lower authorities, including the Assessing Officer, CIT(A) and ITAT. He stated that the CIT(A) rightly sustained the addition following the decision of Hon’ble Apex Court and therefore, his order should be sustained.

15. In the rejoinder, it is stated by the ld. Counsel that whether any receipt is taxable or not is purely a legal question and therefore, the assessee was fully entitled to claim before the CIT(A) that the interest income was capital receipt not liable to be taxed. In support of his contention, he relied upon the decision of Hon’ble Apex Court in the case of National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383. He further submitted that the CIT(A) has also not disputed that the assessee is not entitled to raise this question before him but he rejected the assessee’s claim on merit. The Revenue is neither in appeal nor in cross-objection against the order of the CIT(A) and therefore, at this stage, the Revenue cannot claim that the assessee could not have raised this issue before the CIT(A). He, therefore, submitted that the issue of taxability of the interest may be decided on merit.

16. We have carefully considered the arguments of both the sides and perused the material placed before us. The assessee by way of ground No.1 has disputed the taxability of interest income of Rs.1,35,87,158/- which was claimed to be capital receipt in the return of income. By way of Ground No.2, the assessee has disputed the taxability of interest income of Rs.2,03,36,936/- which was disclosed as income in the return of income but during the course of assessment proceedings claimed to be capital receipt. Ground No.4 is with regard to taxability of interest income of Rs.7,91,51,306/- which was offered as income in the return of income but claimed to be capital receipt before the CIT(A). Before we proceed further, we would like to point out here that Ground Nos. 2 & 3 are overlapping. The sum of Rs.2,03,36,936/- is part of sum of Rs.7,91,51,306/-. Therefore, if Ground No.4 is considered for decision on merit, no separate adjudication of Ground No.3 is required. The ld. Departmental Representative has disputed the adjudication of the Ground No.4 on merit by way of pointing out that this amount was offered as income in the return of income. However, we find that the assessee has raised this ground before the CIT(A) who has admitted this ground and adjudicated on merit. Since on merit he decided against the assessee, the assessee is in appeal. Revenue is neither in appeal nor in cross-objection challenging the consideration of this ground by the CIT(A). Therefore, at this stage, the ld. Departmental Representative cannot dispute that the assessee is not permitted to raise this ground before the ITAT. Moreover, we find that this issue is settled by the Hon’ble Apex Court in the case of National Thermal Power Co. Ltd. (supra). In the said case, the assessee had offered the interest income in the return of income and did not dispute the taxability of interest income before the CIT(A) and even before the Tribunal in the grounds of appeal. However, during the course of hearing before the ITAT, additional ground was raised challenging the taxability of interest income. The ITAT refused to entertain the said ground. On appeal, the Hon’ble Apex Court held that “Tribunal had jurisdiction to examine a question of law which arose from the facts as found by the IT authorities and having a bearing on the tax liability of the assessee”. Therefore, the assessee can raise the ground for the first time before the Tribunal even if the interest was offered as income in the return of income provided relevant facts for adjudication of the said ground are available on record. Admittedly, in this case all the relevant facts are available on record and were considered by the Assessing Officer. Moreover, as we have already pointed out, this ground was raised before the CIT(A) and who has adjudicated on merit. In view of above factual and legal position, we are of the opinion that the Ground No.4 as raised by the assessee needs to be adjudicated on merit. In the ground No.4, the assessee has disputed the taxability of interest income of Rs.7,91,51,306/- which included the interest income of Rs.2,03,36,936/-; therefore, in our opinion, Ground No.3 does not require any separate adjudication.

17. In our opinion, Ground No.2 as well as Ground No.4, which require adjudication, are similar. Therefore, we proceed to adjudicate both these grounds together.

18. We find that both the parties have relied upon the decisions of the Hon’ble Apex Court and in addition, the assessee has relied upon the decision of Hon’ble Delhi High Court. Therefore, it would be appropriate to first refer to those decisions. In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), the Hon’ble Apex Court held as under:—

“…that the company had surplus funds in its hands. In order to earn income out of the surplus funds, it had invested the amount for the purpose of earning interest. The interest thus earned was clearly of revenue nature and would have to be taxed accordingly. The accountants might have taken some other view but accountancy practice was not necessarily good law. This was not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as it liked. The application of the income for payment of interest would not affect its taxability in any way. The company could not claim any relief under section70 or section 71 since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting years. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business could not be allowed as deduction, nor could it be adjusted against any other income under any other head. Similarly any income from a non-business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee.”

19. In the case of Bokaro Steel Ltd. (supra), the Hon’ble Apex Court, after considering the decision of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), held as under:—

“…, dismissing the appeal, that the first three heads of income were (i) the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee, (ii) hire charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and (iii) interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction. The activities of the assessee in connection with all these three receipts were directly connected with or incidental to the work of construction of its plant undertaken by the assessee. The advances which the assessee made to the contractors to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitch as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. They had, therefore, been rightly held as capital receipts and not income of the assessee from any independent source.”

20. In the case of Karnal Co-operative Sugar Mills Ltd. (supra), their Lordships of Hon’ble Apex Court, after applying the decision of Bokaro Steel Ltd. (supra), held as under:—

“Held, that, in the present case, the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessee’s agreement with the supplier. It was on the money so deposited that some interest had been earned. This was, therefore, not a case where any surplus share capital money which was lying idle had been deposited in the bank for the purpose of earning interest. The deposit of money in the present case was directly linked with the purchase of plant and machinery. Hence, any income earned on such deposit was incidental to the acquisition of assets for the setting up of the plant and machinery. The interest was a capital receipt, which would go to reduce the cost of asset. “

21. In the case of Karnataka Power Corporation (supra), their Lordships of Hon’ble Apex Court, following the decision ofBokaro Steel Ltd. (supra), held as under:—

“…also, (i) that the Tribunal was right in law in upholding the order of the Commissioner (Appeals) who deleted the addition of Rs.1,30,44,518/- being interest receipts and hire charges from contractors by holding that the same were in the nature of capital receipts which would go to reduce capital cost.”

22. In the case of Bongaigaon Refinery & Petrochemicals Ltd. (supra), the Hon’ble Apex Court, after considering the decision of Bokaro Steel Ltd. (supra), held as under:—

” reversing the decision of the High Court in relation to these items of income, that these items of receipts were not taxable income but were to be adjusted against the project cost for the business of oil refinery and petro-chemicals.”

23. That the Hon’ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra), after considering the decisions in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and Bokaro Steel Ltd. (supra) at length, held at pages 258, 259 and 260 of report, i.e., Indian Oil Panipat Ltd. (supra), as under:—

“5. In our opinion the Tribunal has misconstrued the ratio of the judgment of the Supreme Court in the case ofTuticorin Alkali Chemicals [1997] 227 ITR 172 and that of Bokaro Steel Ltd. [1999] 236 ITR 315. The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals [1997] 227 ITR 172 is that if funds have been borrowed for setting up of a plant and if the funds are ‘surplus’ and then by virtue of that circumstance they are invested in fixed deposits the income earned in the form of interest will be taxable under the head “Income from other sources’. On the other hand the ratio of the Supreme Court judgment in Bokaro Steel Ltd. [1999] 236 ITR 315 to our mind is that if income is earned, whether by way of interest or in any other manner on funds which are otherwise ‘inextricably linked’ to the setting up of the plant, such income is required to be capitalized to be set off against pre-operative expenses.

5.1 The test, therefore, to our mind is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the plant. The clue is perhaps available in s. 3 of the Act which states that for newly set up business the previous year shall be the period beginning with the date of setting up of the business. Therefore, as per the provision of s. 4 of the Act which is the charging section income which arises to an assessee from the date of setting of the business but prior to commencement is chargeable to tax depending on whether it is of a revenue nature or capital receipt. The income of a newly set up business, post the date of its setting up can be taxed if it is of a revenue nature under any of the heads provided under s. 14 in Chapter IV of the Act. For an income to be classified as income under the head “Profits and gains of business or profession” it would have to be an activity which is in some manner or form connected with business. The word “business” is of wide import which would also include all such activities which coalesce into setting up of the business. See Mazagaon Dock Ltd. v. CIT/CEPT[1958] 34 ITR 368 (SC) and Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765 (SC). Once it is held that the assessee’s income is an income connected with business, which would be so in the present case, in view of the finding of fact by the CIT(A) that the monies which were inducted into the joint venture company by the joint venture partners were primarily infused to purchase land and to develop infrastructure then it cannot be held that the income derived by parking the funds temporarily with Tokyo Mitsubishi Bank, will result in the character of the funds being changed, in as much as the interest earned from the bank would have a hue different than that of business and be brought to tax under the head ‘Income from other sources’. It is well-settled that an income received by the assessee can be taxed under the head “Income from other sources” only if it does not fall under any other head of income as provided in s. 14 of the Act. The head “Income from other sources” is a residuary head of income. See S.G. Mercantile Corporation (P) Ltd. v. CIT (1972) 83 ITR 700 (SC) and CIT v. Govinda Choudhury & Sons [1993] 203 ITR 881 (SC).

5.2 It is clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals[1997] 227 ITR 172 it was found by the authorities that the funds available with the assessee in that case were ‘surplus’ and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated as ‘income from other sources’. On the other hand in Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) where the assessee had earned interest on advance paid to contractors during pre-commencement period was found to be ‘inextricably linked’ to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against pre-operative expenses.” (Emphasis supplied)

24. From the above, it is evident that the Hon’ble Delhi High Court has considered and interpreted the decisions of Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) as well as Bokaro Steel Ltd. (supra). The conclusion of the Delhi High Court is in fact the law which emerges as per the decision of Hon’ble Apex Court. Therefore, in our opinion, the CIT(A) was not justified in ignoring the decision of Hon’ble Delhi High Court by simply mentioning that the issue is covered by the decision of Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd.(supra). After considering these two decisions of the Hon’ble Apex Court and also some other decisions of the Hon’ble Apex Court, their Lordships of the Delhi High Court arrived at the conclusion “it is clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for the specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business, it was in the nature of capital receipt and hence was required to be set off against the pre-operative expenses.” That, the ratio of the above finding of the Hon’ble Delhi High Court would be squarely applicable to the facts of the assessee’s case, because admittedly in the case under appeal before us the share capital as well as loans were raised for the specific purpose of setting up of the power generation plants. The business of the assessee has not been commenced and therefore, as per above decision, the interest received in the period prior to commencement of business was in the nature of capital receipt and hence was required to be set off against the pre-operative expenses. The assessee has already set off the interest income against the pre-operative expenses which is titled as “project development expenditure”. In view of above, we are of the opinion that the interest income of Rs.1,35,87,158/- as well as Rs.7,91,51,306/- was a capital receipt not chargeable to tax during the year under consideration. Accordingly, Ground Nos. 2 and 4 of the assessee’s appeal are allowed.

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